Social good protected by state law

Updated 6:44 pm, Saturday, December 15, 2012

Fewer than 80 California companies have taken advantage of a nearly year-old law allowing organizations to prioritize principles as well as profits, in what some see as a sluggish start for the new corporate structure.

AB361 enables businesses in the state to register as Benefit Corporations, which aren't required to prize shareholder returns above all else, as mandated under standard corporate law.

This provides legal protection from investor lawsuits should social or environmental goals come at the expense of financial returns. But the law goes beyond that, actually obligating these businesses to publish an annual report assessing their social impact against third-party standards.

Holding off

UC Berkeley law Professor Eric Talley has been tracking the registrations over the last year and is circulating a draft report that explores what he describes as the "modest take-up rates."

He said it's premature to conclude anything about the ultimate success of Benefit Corporations and similar structures. But he suspects that many businesses are holding off to see how the marketplace and courts interpret the new business forms.

"There is some natural reluctance to be the first canary to fly into the cave," he said.

The list of registered Benefit Corporations from the California secretary of state's office spans a variety of sectors, including solar panels, online retail, higher education, travel agencies, organic produce and more. But there aren't a lot of big names showing up so far. The most recognizable include:

-- Patagonia, the outdoor clothing company formed by rock-climbing pioneer and environmentalist Yvon Chouinard.

-- Yerdle, a San Francisco company co-founded by former Sierra Club President Adam Werbach to help people share or give away things they no longer use.

-- Sun Light & Power, a 36-year-old Berkeley solar power company with about 70 employees.

"It was sort of a no-brainer, if you look at how we operate already," said Gary Gerber, chief executive of Sun Light & Power. "We're already essentially a B Corp. So it's a protection of the company's mission-driven values."

Providing service

Some have opposed such preferences, though, arguing that stating social goals says nothing about a company's ability to provide better services to cities. In addition, nonprofit groups have openly worried that these companies could draw away socially conscious dollars that now go to pure charities.

Thirteen states have passed laws allowing Benefit Corporations, though California's version includes some of the strictest transparency rules. The state also approved a law that went into effect the same day enabling companies to register as Flexible Purpose Corporations. This legal structure is a step in the same direction, but with fewer hard obligations.

So far, California businesses have overwhelmingly selected the stricter option, with only 22 opting for the flexible structure.

Jay Coen Gilbert, co-founder of B Lab in Berwyn, Pa., sees a different story in the California list from Talley, describing the Benefit Corporation option as "incredibly widely adopted."

"The market is speaking," he said. "They're reaching for the highest bar, which makes them more attractive to prospective employees, customers and investors looking for companies they can believe in."

Coen Gilbert's nonprofit group is one of several that create third-party standards that Benefit Corporations can use to evaluate themselves, as required under these laws. B Lab also provides an audited B Corporation certification process that provides a stamp of approval like the Fair Trade label.

Companies were pursuing that certification even before the laws were in place. In fact, there are about 160 certified firms in California, more than have registered with the state, a differential that could underscore the wait-and-see attitude that Talley cites.

Legal shields

One of the big concerns among some entrepreneurs is how registering as a Benefit Corporation could affect fundraising efforts. It seems at least possible that certain investors will avoid businesses that wield such strong legal shields against their shareholders.

"There's a concern that if these alternative goals get too broad and multifaceted, it will have an eroding effect on the accountability of a board or CEO," Talley said.

Coen Gilbert dismisses that idea, pointing to research from McKinsey & Co. and others that show companies that prioritize sustainability and similar social goals often perform better financially as well.

Gerber says he wouldn't want money from investors who aren't on board with his company's mission.

"Even if I weren't a B Corp., I would be making it hard to get money on my own, because I would refuse to deal with money that has the wrong kind of strings attached," he said.

Gerber says he's the company's sole shareholder.

But there are certainly some high-profile investors who are fans of the new structures. Notably, New York's Union Square Ventures applauded when its portfolio company, online marketplace Etsy, earned its B Corporation certification.

"We have come to believe that the best long-term steward of a network will be a company that focuses on value creation for all participants in the network instead of solely for its shareholders," partner Albert Wenger wrote on the venture capital firm's blog.

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